This process won’t deal with the central weakness of his administration. They have no clearly definable strategy to lift the country out of the economic treadmill of more austerity and no growth. The workings of Cabinet are devoid of vision, creativity and innovative thinking. Rituals of annual budgets, legislative programme and implementing the programme for government are the best we can hope for. There is no big idea or new creativity. It’s sadly reminiscent of the Cowen regime, hoping good news will turn up. Leadership is confined to responding to events — this week it’s lambasting Revenue personnel for implementing tax law.
Since 2007, the recurring theme from political leaders is false optimism. Just around the corner, each next year, the economy will stabilise, recovery will ensue — growth forecasts tell the story: 1.6% in 2012; 2.4% in 2013 and 3% respectively for 2014 and 2015. We are always on the verge of an upturn. This is despite negative external prospects of double-dip risks within the eurozone and beyond. The Taoiseach repeatedly asserts, we will return to the sovereign bond markets by the end of this year. He gets this advice from the department of finance and NTMA, whose boss John Corrigan asserts he will sell treasury bills again in 2012.
This is in stark contrast with the predictions of Roubini Global Economics (Nobel prize-winning economist, who accurately predicted the credit crunch). They don’t buy into the green jersey spin that Ireland is model student in the bailout class. They observe the impact of five severe budgets, resulting in a 1.9% decline in GDP in the third-quarter of last year. Their take on our fiscal retrenchment is that €21 billion has been achieved, and this must rise to €33.4bn over the next four years. Consequently, their expectation is that Irish GDP will stagnate for the next two years. Instead of a return to the markets, they claim we face a second bailout or “bail in”. This new term defines official debt restructuring/discount by our EU, IMF and ECB creditors. Their overall assessment is that our main export economies, ie the US, Britain and eurozone states will stall, resulting in less growth in our pharma and computer services output. Who can we believe? Not official massage merchants.
Exchequer returns for 2011 are appalling — the worst deficit in Europe. The top-line figures were a budget deficit of €25bn in the context of total tax take of €34bn, surpassing previous records. The Department of Finance highlighted their great news that for the first time in four years, tax revenue was up 7% — signifying economic stabilisation. They must regard analysts and the public as fools. The universal social charge receipts distort past comparisons. When you strip out the new 0.6% levy on pension assets, which raised €460m, and delayed corporation tax receipts, you find on a like-for-like basis that overall Exchequer revenue fell by 3%. The acknowledged shortfall of €873m is understated by the full figure of €1,070m. They couldn’t even get their prediction for the annual outturn correct on budget day, December 6.
This underlying weakness in the economy is significant when assessing the likelihood of achieving budgetary revenue targets for this year. The big-ticket item was the 2% VAT increase in the top rate, which is promised to yield an additional €670m. VAT receipts in 2011 under performed by almost €500m. An exodus of purchases across the border or dampened demand could result in an emergency mini budget. This must be coupled with dubious targets for savings under headings of welfare fraud, generic drugs and vague generalities about waste. The overriding political priority was short-term consideration of political expediency in just getting through the budget with minimum flak and backbench dissent. They seem blissfully unaware that their top line political promises are becoming untenable. Three key assurances in the Programme for the Government are: “The government will maintain the current rates of income tax, together with bands and credits. We will not increase the top marginal rates of taxes on income… We will maintain social welfare rates … and adherence to the Croke Park Agreement.”
These mega-commitments relate to the biggest single source of revenue, most expensive Department and single greatest cost component of public services. If these remain off-limits, it is inevitable there will be conflict with the troika. The bailout boys return this week. They have sussed impossibility of achieving a further €3.5bn fiscal adjustment in 2013, without revisiting these redline undertakings. In the context of zero real growth and weak domestic demand, big-ticket items will have to be reviewed. Kenny and Gilmore will have to eat their words.
The bailout terms promised to cut welfare spending by 10% or €2bn. No clamp downs can yield such savings. Either some rates of payment or entitlements will have to be cut to reduce €20.3bn allocated to the Department of Social Protection. No reference was made in the budget speech of means testing or taxing universal benefits, such as child benefit or free household packages. The failure to confront these inevitable medium-term realities reflects an absence of political courage and a lack of leadership. €15bn of public sector payroll costs remain intact, irrespective of early-retirements by 9,000 personnel. An average reduction of 5% in pay and pensions could achieve the required rectitude.
Another amber flashing light in government circles is debt servicing costs. As efforts are made to close the primary deficit between spending and taxation, legacy costs of past deficits come back to haunt us. Interest charges this year will be €5.4bn. These are set to rise sharply towards 2014. Additionally, no progress has been made on ameliorating the €3.1bn repayable at the end of March annually for a decade. The interest costs alone for Anglo and Nationwide amount to €17bn. Meanwhile, bank bailout costs in other eurozone countries will now be carried by the European Financial Stability Facility (EFSF). These collective costs are already greater than our education budget. Instead of demanding equitable treatment, we insist that our debt obligations are so sustainable that we will return to the markets in a matter of months.
Back in 2008, the mainstream media either hadn’t the guts or insight to call the banking crisis as it was. Bankers were telling patent porkies. Four years later, the same credibility crisis pervades the national finances. Despite 14 years in opposition, there is a palpable paucity of new ideas. The revamped department of expenditure and public service reform represents a rare innovation, with an overriding business as usual continuity. Yet again, when an individual calls it as it is — he’s derided as a maverick. Richard Tol exited the ESRI with a sobering exposé. The response is to castigate him rather than acknowledge the logic of his analysis. What about the Taoiseach’s own report card? His happy clappy feelgood style may suffice on a phone-in to a New York radio programme, but it won’t rescue a nation from ruin.